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What is a Holding Period

05 Aug 2023

Introduction 

  • The stock market is a dynamic place where investors trade in various securities.
  • The primary objective of stock market investment is wealth creation, with the added benefit of portfolio diversification. 
  • To streamline your investment journey, it is necessary to be acquainted with the stock market's terminology.
  • This article sheds light on an important term known as the 'holding period.'

What is a Holding Period? 

  • The term 'holding period' refers to the time duration for which an investor holds a particular stock. It is the duration between the purchase and sale of an asset.
  • If an investor invests Rs. 1,50,000 with an interest rate of 10% for five years, the holding period will be five years.
  • The holding period can be short-term or long-term. If the share is held for less than a year, it is considered a short-term holding; otherwise, a long-term holding. 

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How is the Holding Period Calculated? 

  • The formula for calculating the holding period is given below: 

Return = Income = (EOPV - IV) / IV 

EOPV stands for End of Period Value. 

IV stands for Initial Value. 

  • The holding period return is a metric that evaluates the worth of a stock and makes comparisons with other available shares.
  • It quantifies the return obtained from holding a stock over a specific period, which can be either positive or negative, depending on the selling price upon disposal.

What is The Importance of a Holding Period? 

Listed below are two major reasons that contribute to the importance of the holding period. 

  • Taxation 

The tax levied on the stock is determined based on the holding period. If an asset is sold before a specific threshold, it becomes subject to short-term capital gains tax. Conversely, assets held for a considerable period of time are subject to long-term capital gains tax.

  • Returns 

The holding period is a crucial factor in calculating investment returns, particularly for equity investments. Such investments offer multiple sources of income, including capital appreciation and dividends.

Conclusion

  • As an investor, it is crucial to understand the concept of a holding period to maximize returns and make intelligent decisions.
  • It not only determines the tax implications but also helps in assessing the performance of the investment. Investors gain a comprehensive picture of their investment's profitability by considering the duration of holding an asset. 

 

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